Pepsi earnings sizzle past estimates

The food and beverage giant beats third quarter expectations. Should you consider it for your portfolio?

By Benzinga Oct 12, 2011 5:45PM

By Jonathan Chen, Benzinga Staff Writer

PepsiCo(PEP) popped past analyst estimates in its third-quarter earnings report Wednesday morning, and shares closed up nearly 3% to $62.70.

The Purchase, N.Y., company reported earnings of $1.31 per share, excluding acquisition charges and other one-time items, on $17.6 billion in revenue. Wall Street had been expecting $1.30 per share on $17.19 billion in revenue. Pepsi delivered some good news on both the top and bottom lines -- understandably important for a company in this environment.

Chief executive Indra Nooyi said the quarter's performance shows the company's efforts to provide tasty products at a good value are working. "We had strong revenue growth across our product portfolio and across our key geographic markets," she added. "We were able to achieve pricing to partially offset commodity cost inflation and at the same time stimulate consumer demand."

What's a better pick, Pepsi or Coca-Cola (KO)? Jim Cramer gives his call in the following video.

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In addition to beating earnings, the company reaffirmed its full-year guidance and said it expects to buy back $2.5 billion worth of company stock in 2011.

There have been calls to split the company between soft drinks and snacks division Frito-Lay, a move some believe would build greater shareholder value. On a conference call with analysts, Nooyi refuted the idea, saying the company would be better off remaining integrated. On CNBC Wednesday morning, chief financial officer Hugh Johnston reiterated Nooyi's statements.

Johnston said that he does not see the value in breaking up Pepsi, which now includes Wimm Bill-Dann, the Russian dairy products company. The theory behind the breakup is that Pepsi, like Kraft(KFT), would be better focused on one business instead of two. It may also allow Frito-Lay to trade at the premium valuation many believe it deserves.

Shares are not expensive for a company that was able to grow its revenues 37% year-over-year, thanks in large part to the Wimm Bill-Dann acquisition. Pepsi shares trade at just over 13 times 2012 earnings and sport a 3.3% dividend yield, significantly higher than the yield on a 10-year U.S. Treasury.

Since the beginning of the year, shares have lost 3.7%, not including dividends. The calls for the Frito-Lay separation may be warranted, especially with that kind of performance.

Either way, Pepsi's third quarter earnings were a tasty treat for investors, especially in a weak economic environment.

Investors may want to drink to that.


Traders who believe that Pepsi will continue delivering strong results might want to consider the following trades:

  • Pepsi shares might be cheap at these levels, trading below the average earnings ratio for the company.
  • Traders may also want to look at Coca-Cola (KO), Pepsi's major competitor.

Traders who believe that Pepsi shares will underperform due to worries about the breakup may consider alternate positions:

  • The grumblings of breaking up the company may continue to grow louder, and shares could lag peers of the company due to worries about the company executing this plan. Traders may want to short Pepsi until they get a better idea of whether Pepsi will actually break up or not. 

Benzinga does not offer investment advice nor does it recommend that you buy, sell, or hold any security.

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